Markets Live: Acrux craters, Goodman gallops

Patrick Commins

A takeover bid - quickly deflected by the board - pushed the Goodman Fielder share price 15 per cent higher, making it the clear winner today.

Gold miners enjoyed a heightened level of fear among investors, while Woolworths had a big day as well.

Acrux collapsed 33 per cent on a sales update, while iron ore miners had a tough session and rare earths miner Lynas had a day to forget.

Best and worst performing stocks in the ASX 200 today.

4:28pm on 28 Apr 2014

Investors fled to the perceived safety of the big banks, Woolies and Telstra, while the miners fell, resulting in the slightest gains for the market.

The ASX 200 closed 5 points higher to 5536.1, while the All Ords was flat.

There were more losers than winners, but some big names managed to keep the market above water: Woolies climbed 2 per cent, CBA was up 0.7 per cent, ANZ 0.8 per cent and NAB 0.5 per cent. Westpac was a relative lagger among the big banks, advancing 0.2 per cent.

Newcrest led gold miners higher (+4.8 per cent) as investors looked to gold as a hedge against worsening tensions in Ukraine.

BHP dropped 1.1 per cent, Rio 1.5 per cent and Fortescue 4.1 per cent as the iron ore price fell and investors sold down Chinese stocks.

Goodman Fielder galloped 15 per cent higher on a takeover bid while Acrux shed a third of its market cap.

4:20pm on 28 Apr 2014

You can't blame private equity (PE) for selling dud floats to ignorant investors. Buying underperforming businesses, gearing them up, turning them around and then selling out at the highest possible price is what private equity should do.

The fact that many floats now trade below their issue price is evidence of them doing their job rather well. Stiffing mug punters just happens to be part of it.

But each time private equity “wins” by flogging an over-priced business, getting the next float away becomes that much harder.

Enter the private equity industry body, the Australian Private Equity & Venture Capital Association, which recently released a rather impressive report.

“Private equity study back sector's floats” claimed the headline in The Australian. Rothschild undertook research that revealed that from 1 January 2003 to the end of February 2014, floats from private equity vendors significantly outperformed “non PE-backed” offers, delivering “average return of 95 per cent since listing, compared with a 2.2 per cent decline for floats that were not backed by private equity”.

“This,” according to AVCAL CEO Yasser El-Ansary, “puts to bed the view held by some in the marketplace that companies backed by private equity tend to underperform once listed on the capital markets—the data makes it very clear that's simply not the case.”

Anyone smell a rat here? My colleague Gareth Brown certainly did. After spending a few hours trawling through the full report, Gareth found that the data isn't quite as categorical as Mr El-Ansary claims.

The PE-backed average results are completely skewed by three big winners: JB Hi-Fi, Seek and Invocare, all of which were massively oversubscribed. And yet there is no adjustment for the fact that most investors would have had their allocation scaled back, perhaps to zero.

China stocks began the week with a fourth straight day of losses, shedding more than 1 per cent after comments from President Xi Jinping cast doubt on hopes for further stimulus.

Hong Kong shares were also down, with index heavyweight Tencent the biggest drag on the market as investors worried that a clampdown on online video may affect future revenues.

By midday, the CSI300 index of the largest Shanghai and Shenzhen A-share listings fell 1.2 percent, while the Shanghai Composite Index slipped 1.2 percent to 2,011.43 points.

The Hang Seng Index was down 0.4 percent at 22,137.31 points. The China Enterprises Index of the top Chinese listings in Hong Kong dropped 0.1 percent.

Mainland investor confidence took a further hit over the weekend after state media reported comments from Xi Jinping at a politburo meeting on Friday, saying that current fiscal and monetary policies would basically remain unchanged.

"I think the language he used and the overall content in the speech was below what people had expected," said Du Changchun, an analyst at Northeast Securities in Shanghai.

"If there's no change in basic economic policy then it's likely there won't be any strong measures, and overall this is dragging on expectations."

In Hong Kong, shares in Tencent fell 3 per cent, after China's State Administration of Press, Publication, Radio, Film and Television banned four popular U.S. TV shows from being broadcast on online video streaming sites.

The ban is expected to precede a wider crackdown on foreign shows being aired on Chinese online platforms, which are currently enjoying rapid growth and are expected to be worth 37 billion yuan by 2017, according to iresearch.

Tencent operates China's biggest online video platform, according to its own website.

3:31pm on 28 Apr 2014

Months after a fierce bidding war erupted over Warrnambool Cheese and Butter, foreign investors are circling another Australian food company.

But unlike the contest for WCB, which made it the world's most expensive dairy company, a takeover offer for wholesale food supplier Goodman Fielder has been branded "opportunistic" as the company warns of further write-downs

Goodman Fielder, which owns brands including Helgas, Meadow Lea and Praise, is in one of the toughest food manufacturing categories, analysts say.

The bleak assessment comes despite much hype surrounding Australian food companies and their ability to cash in on the so-called Asian 'dining boom'.

But PAC Partners analyst Paul Jensz said Australian food supply chain could not be viewed as a whole. Instead he broke it down to four categories - companies that own land (AACo), distributors and commodity traders (Elders, Ruralco), primary processors (Warrnambool Cheese and Butter, Bega Cheese) and companies that add further value from branding and marketing (Goodman Fielder).

"The tougher place to be in recent times has been in distribution assets space and branding," Mr Jensz said, adding that larger food processors have had stronger pricing power.

"In essence those that have a lot of control over their destiny have done well and been taken over at a premium, like Warrnambool Cheese and Butter.

"Those companies that don't have a lot of control over their own destiny find themselves vulnerable."

Money managers increased their net-long position in gold in the week ended April 22, snapping a four-week retreat that was the longest this year. The metal climbed in the next three days, sending futures to the best start to a year since 2006.

Bullion reached a six-month high after Russia annexed Crimea last month, and then fell almost 9 per cent on signs that peace would return. Hostilities last week fuelled demand for haven assets as the 28-nation European Union prepared to impose more sanctions against Russians in positions of power.

“You’re going to get a lot of backwards and forwards in gold,” Adrian Day, president of Adrian Day Asset Management in Annapolis, Maryland, said. “The gold situation has been compounded by Ukraine. I’m very bullish on gold, but it’s going to be a trade for the patient.”

Gold has climbed 8.4 per cent in 2014, rebounding from last year’s 28 per cent slump, the biggest since 1981. Unusually cold winter weather stymied US economic growth, while tensions between Russia and Ukraine flared. Russian President Vladimir Putin last week warned Ukraine against continuing an anti-separatist offensive that killed five rebels.

Hedge funds have had a difficult time predicting gold’s next move, misjudging prices in two of the past four weeks. The money managers are in good company. Barrick Gold Chairman Peter Munk said last week he finds it impossible to accurately predict the value of the precious metal, echoing comments made by Federal Reserve Chairman Janet Yellen and her predecessor Ben S. Bernanke.

The metals and mining index is now down almost 1 per cent, enough to wipe out what had been a weak gain on the ASX 200.

BHP is down 0.7 per cent, Rio 1.4 per cent and Fortescue 3.7 per cent.

Acrux is still the worst performer. It's losses have accelerated following this morning's update (see post at 11:12am) - the stock is now 31 per cent down.

2:24pm on 28 Apr 2014

Technology stocks have never been the best friend of the equity income investor. Until the financial crisis struck in 2008, the yield on the MSCI Global Technology index remained resolutely below 1 per cent, with many tech companies simply not having the free cash flows to pay meaningful dividends. Those that did generally preferred to splurge on acquisitions as they chased market share in a frenetic land grab.

And even after the global stock market sell-off briefly pushed yields above 2 per cent in late 2008 and early 2009, they sank back to little over 1 per cent in 2010.

However, yields have since climbed back above 1.5 per cent and some equity income fund managers, at least, are starting to take note.

“Traditionally, technology companies never really paid dividends, so we were unable to make investments, resulting in us being structurally underweight technology for a long time,” says Nick Clay, co-manager of the £4bn Newton Global Higher Income fund.

“However, of late some of the more mature technology companies have started paying dividends and are increasingly doing so. You have the likes of Apple, Cisco and Microsoft, which are all paying cash back to investors.”

The US company heading up the Leviathan gas venture in Israel has signalled that it will not hold up its own efforts to develop the giant resource waiting for Woodside Petroleum to complete its delayed entry into the project.

Chuck Davidson, chief executive of Noble Energy, told investors in the US on Friday that negotiations on the transaction with Woodside were "down to the fine details", with only an "unresolved tax issue" preventing the deal from completing.

He said that while the issue will "hopefully" be resolved, the Leviathan partners are pursuing plans to market the gas and develop the field to make sure the project proceeds with or without Woodside.

"We would like to have them as a partner as a part of this project," Mr Davidson said on a briefing on Noble's first-quarter results.

"But right now, with all of the other things that have been cleared out, we and our existing partners are moving forward, and we're starting to take steps to make sure that we can deliver this project."

Woodside missed a March 27 deadline to complete its purchase of a 25 per cent stake in the 19 trillion cubic feet Leviathan gas field off the Israeli coast as it sought to nail down details with the Israeli government on how gas exports would be taxed, and the tax treatment of the deal itself.

Following Apple's $17 billion ($18.3 billion) bond issuance is 2013 - the largest corporate bond sale at the time - the tech giant is preparing to offer a similar chunk of debt in 2014.

The bond sales will likely help fund Apple's massive share buyback program, which it last week increased from $US60 billion to $US90 billion.

It is estimated that Apple has close to $US140 billion in cash stowed away, but around two thirds of that is from overseas earnings.

Apple cannot use overseas earnings to fund share buybacks or dividends without repatriating the cash in United States and paying the country's corporate tax rate of 35 per cent.

"To repatriate our foreign cash under current US tax law, we would incur significant cash tax consequences and we don't believe this would be in the best interest of our shareholders," Apple vice-president Luca Maestri told shareholders at the company's quarterly results.

Customers queue at an Apple store in Munich, Germany. Photo: ReutersBack to top

12:59pm on 28 Apr 2014

Australian facilities management company Spotless Group plans to raise as much as $1 billion in the country's biggest initial public offering so far this year.

Spotless is offering 540.5 million new and existing shares at A$1.60 to A$1.85 each, partly to repay debt, the company said today.

The planned share sale comes less than two years after Australia's biggest private equity firm Pacific Equity Partners (PEP) acquired the group for A$1.3 billion. PEP will retain 49 per cent of the business after the IPO.

The sale will give Spotless a market value of A$1.76 billion to A$1.93 billion.

The quality of earnings and margins had improved under private management, Spotless Chairman Margaret Jackson said, as the company exited loss-making and marginal contracts to focus on higher margin contracts.

Jackson also said the catering, cleaning and laundry group was benefiting from a trend towards outsourcing in the industry as it continued a restructure started when PEP took control of the business in August 2012.

"The business has identified potential new contract opportunities representing approximately A$1.5 billion in annual revenue coming to market by the end of full year 2015, with further significant new opportunities in adjacent services and sectors," Jackson said in a statement.

The back-end bookbuild is scheduled to take place on May 20-21, which will set the price for the IPO.

The final price is due to be announced on May 22 with the listing scheduled for May 28.

The proposed IPO surpasses the A$450 million raised by Japara Healthcare earlier this month.

12:22pm on 28 Apr 2014

Ripped off: the cost of running the Aussie super system is much higher than the OECD average. Source: Grattan Institute.

Australians are paying 50 per cent more in superannuation fees than they should be, equivalent to around $10 billion, according to analysis by the Grattan Institute.

The authors point out that the cost of running the local super system is much higher than the OECD average. And despite the local industry tripling in size to $1.7 trillion over the past decade, fees have barely budged – so much for economies of scale.

Public apathy was mostly to blame, with only a small proportion of Aussies taking an active interest in their super (outside those who have turned to managing their own savings, of course).

One of the report’s recommendations is that super funds should be forced to submit to a regular official auction to become the nation’s “default” super provider.

The report also notes that when it comes to identifying which super fund will be the best performing, the most effective way is to go about it is to look for funds with the lowest fees.

“While superannuation account holders would do better than average if they chose a fund that had previously delivered high net returns, they would perform better still if they chose super funds based on fees alone,” the report says.

11:58am on 28 Apr 2014

Former Xstrata boss Mick Davis is seeking a loan of up to $US8 billion ($8.6 billion) to help bankroll an acquisition of BHP Billiton non-core assets through his new private equity vehicle X2 Resources, according to The Sunday Times.

He is reportedly in talks to strike a deal for up to $US15 billion to buy some of the non-core assets BHP is looking to sell or spin-off under a demerger, which would be gifted to shareholders.

Mr Davis has been trying to negotiate a loan of up to $US8 billion ($8.6 billion) with JPMorgan to finance the purchase of BHP's thermal coal division, The Sunday Times reported on its web site.

He is also thought to be looking at the mining giant's aluminium, nickel and manganese operations.

The purchase of the BHP assets would unwind BHP's merger with Billiton in 2001.

Mr Davis is a former Billiton executive who has already drummed up $US3.7 billion from investors for X2.

His establishment of a new mining fund, which is co-headed by former Xstrata chief financial officer Trevor Reid, comes at an opportune time.

Major resources companies, including Rio Tinto and BHP Billiton, are trying to shed underperforming or non-core assets to return cash to shareholders.

He quietly bought a 9.7 per cent stake in drug company Allergan in the past two months. He bought the Allergan share options after Valeant Pharmaceuticals confidentially told him it intended to launch a takeover for its competitor, presumably at a premium to the market price.

Valeant sought to team up with Ackman, a high-profile activist investor, to make its hostile acquisition easier after previous overtures were rejected by Allergan. When plans were announced last week, Allergan’s share price popped, netting Ackman’s Pershing Square Capital Management a paper profit of almost $US1 billion ($1.07 billion) on its $US4 billion outlay.

No one, including those who sold their securities to Ackman at a significant discount to the subsequent trading price, knew of the takeover offer. To some it may be classic insider trading. Some unhappy investors want it examined by the Securities and Exchange Commission.

Yet under the US’s obscure insider trading laws, Ackman has acted legally. His lawyer is Robert Khuzami, the former head of enforcement at the SEC.

“The way the rules work is, you’re actually permitted to trade on inside information as long as you didn’t receive the information from someone who breached a fiduciary duty or a duty of confidentiality,” Ackman confidently said last week.

Trading in takeover target Goodman Fielder kicked off after being delayed by an hour this morning.

The shares are up 10c, or 18.2 per cent, to 65 cents - the offer price from major shareholder Singapore-based agribusiness Wilmar International and Hong Kong-based investment manager First Pacific Company (see post at 9:26 below).

As alluded to below, drug delivery company Acrux has warned it is at risk of missing its next milestone payment from distributor Eli Lilly because concerns about a potential link between testosterone replacement therapy and heart failure have hampered sales in the United States.

Acrux's lead product is Axiron, a therapy to treat hypogonadism, a condition of low or no testosterone in men. In January the US Food and Drug Administration said it would investigate whether TRT increased the risk of heart attack and stroke in some men.

The company and medical professionals have criticised the two studies upon which the FDA based its decision to reassess the safety of testosterone replacement therapy. The FDA has also not advised patients to cease their treatments.

Nonetheless the regulator's move had hurt the industry, Acrux said in an announcement to the market on Monday.

"The US testosterone replacement therapy market has been impacted and unless this improves and/or Axiron's share of market increases, the next milestone may not be met in calendar year 2014," the company said.

Nervous investors have pushed Acrux stock down 15.7 per cent in early trading to $1.395 at 10:46am. The share price has plunged 63 per cent in the past year, despite Acrux delivering a special dividend at the beginning of the year.

With Acrux suffering another leg down (-16 per cent so far this morning), last week's shocker was QrXPharma, which sank from 70c to 10c on a regulatory decision.

Just in case you missed it, here's a story from late last week on analysts' reactions to QRX:

When things go wrong at the speculative end of any sector, they go very wrong.

Take the recently booming biotech industry. The challenge for investors is that the outcome is so often binary, and usually revolves around the regulatory approval or otherwise of a new drug or device.

That can also make it tough for analysts, who can be left in the tricky situation of holding a positive recommendation on a cratering stock.

The response is to back-pedal – fast – or, more creatively, shift the goal posts.

Which leads us to drug developer QRxPharma, whose shares fell 85 per last week, although they have rebounded a little today.

The company was rocked on Wednesday after it failed to win regulatory approval for the release of its painkiller drug, Moxduo, in the US. The stock dropped from 70 cents to 14 cents on the news.

“By the time this research is published, the share price will be down significantly,” Morgans analysts ominously wrote in a note to clients dated April 22, but after the FDA announcement.

And indeed it was – by 80 per cent.

“We recognise… for many the investment is no longer appropriate for certain portfolios,” they admitted as they downgraded the stock from an “add” recommendation with a price target of $1.79, to a “reduce” call and a price target of just 21 cents.

Analysts at JP Morgan were also quick to adjust their price target (from 92 cents to 6 cents) and recommendation (from “neutral” to “underweight”), before raising the spectre of a capital raising down the track for the beleaguered company.

Shares are trading flat at the open, with gold miners the big winners from the escalating tensions in Ukraine.

The ASX 200 is down a point to 5530 and the All Ords is 2 points lower at 5513.1.

Miners such as BHP, Rio and Fortescue are all down, with the big banks broadly flat.

Newcrest Mining is 2.5 per cent higher, with a host of smaller gold names in the top performers early.

Troubled biotech Acrux is down 14.4 per cent after an investor update further spooked already shaky shareholders.

9:58am on 28 Apr 2014

The Oakajee rail and port project has had the most fraught history of any infrastructure development in Australia, writes Pierpont columnist Trevor Sykes:

Over the past quarter of a century, every participant has suffered either financial or reputational damage and not an inch of rail track has yet been laid.

The latest in the long queue appears to be Padbury Mining, which has grandiose plans to finance the project.

PDY has been suspended from trading on the ASX since April 11 and became the centre of a scandal this week when the colourful history of its funding source - hair clinic entrepreneur Roland Bleyer - was publicised in the nation's press.

The rationale for the project is that it would allow large-scale exploitation of the billions of tonnes of iron ore in the mid-west of Western Australia.

The mines that have been opened in the region at present ship out through Geraldton, once a sleepy fishing port and not well-quipped to handle big bulk shipments.

Its access channel is shallow and hard rock, making it unsuitable for dredging. Oakajee, 30 kilometres north, is deep water and would be a better port.

Over the decades, we've seen plenty of previously unknown big shots suddenly appear, talking about money in astronomical numbers and offering to miraculously find fortunes to fund big enterprises.

I cannot recall one of them who ever actually came up with the money or saved the project.

Three of Australia's biggest banks are expected to reward yield-hungry investors by unveiling higher dividends amid predictions that low default rates by borrowers will continue to boost the sector's profits.

ANZ this week will kick off a round of profit results from the big banks, which are forecast to post solid earnings growth thanks to improvements in credit quality.

After ANZ and Westpac shares hit record highs last week, analysts are forecasting ANZ will raise its interim dividend by almost 10 per cent to 80¢ a share at its first-half results on Thursday.

The bank's cash earnings are tipped to rise 8 per cent to about $3.4 billion, according to market estimates, after it revealed a sharp fall in soured loans earlier this year.

A key driver of recent profit growth has come from lower provisions for bad debts - and analysts expect the trend has further to run this year, helped by record low interest rates.

Bell Potter analyst T. S. Lim said he thought the improvement in credit quality would continue, citing ANZ's previous guidance that bad and doubtful debts would fall by 10 per cent this year.

While there is a risk that rising unemployment could trigger an increase in bad loans to households, analysts believe total bad debts will keep falling because there have been few corporate defaults and the commercial real estate market is improving.

Westpac and NAB, which deliver their first-half results next week, are also expected to benefit from the improvement in credit quality.